🚨 Concentrated vs Diversified Investment, Which is Better?
Day 026 | US Stock Investment Guide for Beginners | 2026.01.08
📌 Concentrated vs Diversified Investment, Which is Better?
💬 In stock investing, both concentrated and diversified investment have their own advantages and disadvantages.
Concentrated investment can yield high returns but carries high risk, while diversified investment is stable but may be difficult to achieve large returns. It's important to choose a strategy based on the investor's experience, disposition, and market conditions.
1️⃣ Concepts of Concentrated and Diversified Investment
① Concentrated Investment
- An investment strategy that concentrates funds in a small number of stocks to target high returns.
- For example, investing $10,000 in only 2-3 stocks.
- High volatility and requires strong company analysis skills.
② Diversified Investment
- An investment strategy that divides funds among multiple stocks, various industries, and asset classes to reduce risk.
- For example, dividing $10,000 among 20-30 stocks.
- Lower risk of loss, but returns may be relatively lower.
2️⃣ Advantages and Disadvantages of Each Strategy
① Advantages and Disadvantages of Concentrated Investment
✔ Advantages
- If a specific company grows significantly, high returns are possible.
- Can expect outperformance (alpha) above market returns.
❌ Disadvantages
- If the company underperforms, there's a high possibility of large losses.
- Requires deep understanding of company analysis and market trends.
- High volatility can cause significant psychological pressure.
② Advantages and Disadvantages of Diversified Investment
✔ Advantages
- Can reduce the impact of individual stock underperformance on the entire portfolio.
- Can generate steady returns following the market's long-term growth.
- Provides psychological stability and is suitable for long-term investing.
❌ Disadvantages
- Difficult to expect high short-term returns.
- Excessive diversification can become similar to index ETF investing.
- Management becomes more difficult as the number of stocks increases.
3️⃣ How to Apply in Real Investing?
① Beginner Investors → Diversified Investment is More Suitable
- Invest in various stocks and ETFs to gain experience and learn how to endure market volatility.
- Statistically, 20-25 stocks provide the most efficient diversification effect.
- Index investing like S&P 500 ETFs can also be a good choice.
② Experienced Investors → Concentrated Investment Can Be Considered
- Can concentrate investment in companies you know well and stocks you're confident about.
- However, rather than concentrating excessively in one stock, it's advisable to manage within 5-10 stocks.
③ Strategy Adjustment According to Market Conditions
- Concentrated investment can be advantageous in bull markets.
- Diversified investment is effective in reducing risk in bear markets or highly volatile markets.
4️⃣ Q & A
Q1. Can beginners do concentrated investment?
A1. Concentrated investment is risky for beginners because they lack the ability to select stocks. Initially, it's better to gain experience by investing in ETFs or various diversified stocks.
Q2. Can you still lose money with diversified investment?
A2. Of course. Diversified investment only reduces the possibility of loss; it doesn't prevent loss itself. However, even if one stock crashes, you can minimize its impact on the entire portfolio.
Q3. What problems arise from investing in too many stocks?
A3. Excessive diversification makes it difficult to manage individual stocks and is likely to produce results similar to market average returns. Around 20-25 stocks is an appropriate diversification level.
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